Lansner: Rent hikes follow economic recovery

Dec. 12, 2011

Updated Aug. 21, 2013 1:17 p.m.

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Melinda Graham, regional vice president of Camden apartments, is shown at Camden's property in Mission Viejo. Apartment owners are benefiting from the improving economy. LEONARD ORTIZ, THE ORANGE COUNTY REGISTER

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The swimming pool area at the Camden apartments in Mission Viejo. LEONARD ORTIZ, THE ORANGE COUNTY REGISTER

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The Camden apartments in Mission Viejo have well manicured grounds. LEONARD ORTIZ, THE ORANGE COUNTY REGISTER

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Orange County's economic future may be a "For rent" sign rather than "Sold!"

Orange County landlords again have pricing power. The once-in-a-generation rent slashing of the Great Recession has ended as rental units in many complexes fill up. And if you want to best view the local economic rebound through the real estate prism, try the rental slice, not ownership trends, to see curious progress.

"Business is good, rents are beginning to creep up again," says Melinda Graham, who runs the Southern California and Arizona apartment business for Camden Property Trust of Texas.

Locally, Camden is able to raise rents roughly $70 a month – or a 5 percent annual increase. Graham notes that still leaves her company's rents below the highs of the long-ended go-go era, saying local rent increases "just indicate just how low we had to drop rates. We were down 13 percent."

Graham is sensing what is showing in my Big Orange Index – a compilation of three dozen benchmarks of the local economy. This is by no means a boom time. Rather, we see a continuing but slow advance off the harsh bottom in the local business climate:

•The overall Big O index advanced again last summer, the eighth consecutive quarterly increase. However, broader economic turmoil is taking some toll locally. This was the smallest advance since the initial quarter that started the recent two-year rally.

•Service providers are taking an economic leadership role, with the Big O's subindex for this niche enjoying its first year-over-year gain in three years. Local hotels, for example, are in the midst of a rapid recovery with a key industry cash-flow measure up 18 percent in two years.

•The local shopper is shopping briskly, with the Big O's benchmark for consumer confidence up for the eighth consecutive quarter. That makes shopkeepers happy, as the Big O's merchant index rose for the fifth consecutive quarter.

•Not all is perfect. The Big O's "Boss Index" reflects a rising angst in local corporate circles. Whether that means CEOs sense global challenges – or simply fear at having to hire again – is up for debate.

Such sluggishness in the property game isn't found in the apartment business. There, a confluence of varied economic trends runs in the landlords' favor – plus a potential societal swing anyway from homeownership toward renting.

"It's no longer the Ropers and 'Three's Company,'" Graham says, a reference to the 1970s-'80s TV sitcom that mocked family landlords and apartment living.

'Unbundling'

The apartment business typically rebounds on the strength of the local job market creating a larger group of prospective renters. This recovery, according to Graham – who has been in the apartment game for a quarter-century – is different.

During the middle of the recent downturn, an unexpectedly high number of people doubled up their living arrangements – moving in with relatives or obtaining new or additional roommates. This created extra apartment vacancies and helped cut rents.

As the economic recovery modestly emerges, though, Graham and other landlords witness a rapid "unbundling" – those sharing living arrangements finding enough economic courage to live on their own.

"You have a little better consumer confidence," Graham says, "So you've got parents kicking kids out of the house, and people no longer want to have six roommates."

On top of this phenomenon, landlords have benefitted from housing turmoil that created higher apartment demand. Foreclosures have pushed households out of ownership – 39,000 in Orange County since 2007 alone. Many of these families landed in rentals.

Even high relative affordability of ownership isn't hurting landlords. By Big O math, renting's financial advantage over buying hasn't been this small since at least 1989. But lenders burned by foreclosures have tightened mortgage standards, so local lending runs at one-quarter of the 2003 peak pace. This credit crunch keeps many otherwise potential homebuyers in apartments.

"People find it hard to qualify to buy," Graham says.

'Repositioning'

Camden wants to grow its Southern California presence from its current 3,200 units – including complexes in Costa Mesa, Irvine, Mission Viejo and Fullerton.

This real estate trust is about to build 250 new units in Glendale – and would love to buy some complexes in the region, too. But Camden isn't alone in wanting a bigger slice of the apparently robust apartment business.

"We've been putting in bids, and we keep getting outbid," says Graham, noting that some Southern California apartments' acquisition pricing is near highs last seen in the recent real estate peak – and local values are relatively far stronger here than elsewhere in the nation.

Investors, Graham says, "realize that in California, (apartment) values do hold. Even with the recession, we did not get hit as far down like Arizona or Las Vegas or Atlanta."

Another growth strategy for Camden is "repositioning." That's upgrading the interiors of older complexes with modern touches – such as fancier cabinets and countertops and the latest appliances. Camden's Mission Viejo complex will start such a program shortly.

Graham says such investments can yield as much as $150 a month extra in rents. Many tenants – especially those used to ownership – are willing to pay for the extras, she adds, making for a five-year payback on the costs of the upgrades.

"It's the big thing," Graham says of repositioning.

Still, all is not perfect for landlords. The squishy overall recovery hasn't yet created the industry's main driver – an ample supply of new jobs. In Orange County, for example, unemployment runs near a two-year low, but the local economy still has loosely 170,000 fewer jobs than at the 2007 peak.

"One of the things we're being cautious about is the unemployment rate," Graham says. "And that needle's moving very slowly."

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